L.A. Andersen Partners Talking to Rival Firms

Accounting: The office might sell parts of its business to KPMG and Deloitte & Touche amid possibility the company will go out of business.

Partners in the Los Angeles office of accounting firm Arthur Andersen are in negotiations to sell parts of their Southern California business to rivals KPMG and Deloitte & Touche, according to people familiar with the talks.

Until the Enron Corp. debacle, which has cost Andersen hundreds of clients and sparked massive layoffs, the firm's Southern California operations employed about 1,500 staff members and counted important businesses such as Occidental Petroleum Corp., Edison International and the Dodgers as clients.

Andersen has offices in Los Angeles, Woodland Hills and Irvine.

The talks with rivals are part of a nationwide trend in which individual Andersen practices are seeking to cut deals with other firms in anticipation of the company going out of business.

"There are lots of discussions going on," one Andersen source said. "Different offices are pursuing their own agreements. Partners are looking at all the options for themselves."

None of the firms involved in the discussions would comment, although under various scenarios being considered, different parts of the practice and its staff could go to either KPMG or Deloitte.

And as with other deals involving Andersen, these talks still must deal with how the acquiring firms could insulate themselves from the billions of dollars of claims against Andersen arising from its work for Enron, which is in bankruptcy.

In a separate development, Andersen rejected a bid by leveraged buyout firm Fox Paine & Co. to acquire its national tax practice. Sources said Andersen decided instead to pursue a deal to sell about half of the practice to Deloitte. The practice accounts for about 25% of Andersen's $4.3 billion in annual revenue.

Andersen's outlook turned bleaker this week when it failed to settle its criminal charge of obstruction of justice with the Justice Department. The case will go to trial May 6.

"Every day that goes by, they lose more clients, more partners, more staff members and more revenue," said Randolph Beatty, dean of USC's accounting school. "At a certain point, there won't be anything left."

Though negotiations have broken off in the criminal case and are stalled in Andersen's efforts to settle the giant Enron investor class-action lawsuit, talks continue between Andersen and the Securities and Exchange Commission. Yet it is unclear whether a final deal would be inked in the absence of a parallel settlement with the Justice Department, a source said.

Andersen and the SEC have sketched out the broad contours of a plan to settle civil charges stemming from the collapse of Enron. But key issues, including the exact amount Andersen would pay in a fine, have not been finalized, the source said.

The SEC sought a penalty of as much as $500 million earlier this year. But that amount has been scaled back significantly amid the accounting firm's financial debilitation.